Market trends in Luxembourg
As at April 30, 2019, the total net assets of collective investment undertakings, including UCIs, subject to the law of December 17, 2010 relating to undertakings for collective investment (the 2010 Law), specialised investment funds and SICARs, amounted to EUR 4,404.936 billion against EUR 4,350.449 billion as at March 31, 2019, an increase of 1.25 per cent over a month. Considered over the last twelve months, the volume of net assets constitutes an increase of 4.20 per cent.
The Luxembourg UCI industry therefore recorded a positive change in April amounting to EUR 54.487 billion. This increase represents the balance of negative net issues at EUR 1,209 million (-0.03%) and the favourable trend on the financial markets to EUR 55.696 billion (+1.28 per cent).
The number of collective investment undertakings (UCIs) taken into consideration is 3,871 compared to 3,868 the previous month. 2,513 entities have adopted a multi-compartment structure, representing 13,553 compartments. Adding the 1,358 entities with a traditional structure, a total of 14,911 units are active in the financial centre.
Publication of Brexit Laws and wait-and-see approach of the CSSF
The laws of April 8, 2019 regarding measures to be taken in relation to the financial sector in the event of a withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union (the Brexit Laws) have finally been published.
The Brexit Laws apply to firms established in the UK that prior to Brexit were authorised entities under the Capital Requirements Directive IV (CRD IV), the revised Markets in Financial Instruments Directive (MiFID II), the revised Payments Services Directive (PSD2), the revised Electronic Money Directive (EMD2), the Alternative Investment Fund Managers Directive (AIFM Directive) or the UCITS Directive, as well as to UCITS and Part II UCIs established under the UCI Law of 2010.
The Brexit Laws also cover the situation of investment fund managers established in the UK managing UCIs established in Luxembourg at the date of the Brexit and the specific situation of potential exclusively Brexit-related breaches of investment policies by UCITS and Part II UCIs. The Brexit Laws further clarify the situation of UCITS established in the UK marketed to retail and/or professional investors in Luxembourg at the time of Brexit.
In the event that, and from the date, the UK leaves the EU without concluding a withdrawal agreement based on Article 50(2) of the Treaty on European Union (hard Brexit), UK firms will be considered as “third-country firms” and will lose the benefit of passporting rights under the relevant EU Directives. The purpose of the Brexit Laws is to anticipate the consequences of such loss of passporting rights, to ensure the continuity of existing contracts, the orderly functioning and the stability of the financial markets as well as to ensure the protection of UCI investors in the event of a hard Brexit. As such, the Brexit Laws provide that UK firms may, subject to certain conditions, be permitted to continue their activities in Luxembourg during a transitional period. The Commission de Surveillance du Secteur Financier (CSSF) intends to grant such possibility for a limited period of time. Such safe harbour provisions under the Brexit Laws apply only to contracts that entered into force before the date of Brexit and to contracts concluded post Brexit with close links to contracts that entered into force before the date of Brexit. In all other cases, especially in order to be allowed to conclude new contracts or start new activities, UK firms will be required, as applicable, to set up an establishment in Luxembourg or to submit an application to provide investment services in Luxembourg on a cross-border basis under Article 32-1, paragraph (1) of the law of April 5, 1993 on the financial sector.
Considering the political uncertainties surrounding the Brexit date, as well as the possibility of a hard Brexit, the CSSF has decided to adopt a wait-and-see approach and, based on the developments at a political level, will communicate further to the public in due course as regards the actions to be taken by UK firms to benefit from the transitional period provided for in the Brexit Laws.
Luxembourg provides Brexit support to citizens and businesses
The Luxembourg government has made available on its citizens portal a section dedicated to Brexit issues (in respect of both a deal and a no-deal scenario), which includes an FAQ feature summarising the rules governing Luxembourg citizens residing in the UK and those governing UK citizens residing in Luxembourg in a number of key areas (right to work, residency requirements, family allowances, etc.). The FAQ feature summarises, for both a deal and a no-deal scenario, the rules which will affect businesses established in Luxembourg and businesses based in the UK after the Brexit Date (as defined above).
For example, in the case of a no-deal Brexit, the Luxembourg government has decided that all British citizens and their family members who are resident in Luxembourg when Brexit occurs will retain their right to reside in Luxembourg after the Brexit Date (as defined above) on the strength of the residence documents issued to them as EU citizens. These documents will remain valid until March 30, 2020 and British citizens will need to obtain a residence permit before that date and, accordingly, will need to submit a residence permit application before December 31, 2019 (procedure to be determined).
Publication of forms regarding the free provision of services and the free establishment of a branch on a cross-border basis
Following on the above, in the context of Brexit and ensuing relocations, the CSSF’s recent publication of forms will prove to be useful.
Indeed, as both the free provision of services on a cross-border basis before starting activities pursuant to Article 18 of Directive 2009/65/EC (Article 115 of the Law of December 17, 2010 (UCI Law)) and Article 33 of Directive 2011/61/EU (Article 32 of the AIFM Law) and the creation of a branch requires CSSF authorisation before launching pursuant to Article 17 of Directive 2009/65/EC (Article 114 of the UCI Law) and Article 33 of Directive 2011/61/EU (Article 32 of the AIFM Law), the CSSF has standardised the authorisation processes by publishing on January 3, 2019, a standard form that persons must use when seeking approval from the regulatory authority as member of a managing body/governing body and conducting officer of Investment Fund Managers (IFM). This form must also be used when the IFM reports annually to the CSSF the list of members of its managing body/governing body and each of its conducting officers, as provided for in sub-chapter 4.3 of CSSF Circular 18/698 of August 23, 2018 on the authorisation and organisation of IFMs mentioned above.
The CSSF advises that a submitted notification file can be handled only once it is complete, i.e. that all of the requested information in the tabs is provided and all of the necessary documents attached. Hence, any incomplete notification file will lead to delays in launching or completing the examination phase.
The notification letter shall be signed by an authorised signatory of the manager or a third person empowered by a written mandate to act on behalf of the notifying manager. The signatory shall state his/her full name and capacity, and shall ensure the confirmation is dated (refer to tab 6). The notification files have to be submitted as specified in the "Documents" tab of the forms.
The forms can be accessed here.
AML/CFT investment fund questionnaire SIF/UCI part II/SICAR/ELTIF
The CSSF has put in place an online template collecting standardised key information concerning money laundering and terrorist financing risks (ML/CFT risk) to which professionals under its supervision are exposed and the implementation of related risk mitigation and targeted financial sanctions measures.
This template must be completed when sending a licencing application for setting up a specialised investment fund (SIF), UCI Part II, SICAR or ELTIF. It is complementary to the current “Application questionnaire” already available on the CSSF website.
The questionnaire should be completed by the person responsible for the control of the fight against money laundering and terrorist financing (the AML/CFT Compliance Officer) for the fund, as designated in accordance with Article 40 (1) of CSSF Regulation 12-02 of December 14, 2012 on the fight against money laundering and terrorist financing. The CSSF must receive this questionnaire by email before it acknowledges receipt of the licensing application file.
The AML/CFT investment fund questionnaire is available on the CSSF website under the relevant forms, depending on the type of fund intended to be launched. This questionnaire contributes to the CSSF’s ongoing assessment of ML/CFT risks present in the investment fund industry and forms part of the AML/CFT risk-based supervision approach put in place by the CSSF over recent years.
Updated CSSF FAQs concerning the PRIIPs KID
On April 11, 2019, the CSSF published updated versions of its FAQ documents on the Luxembourg AIFM Law and on the UCI Law, which both concern the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs).
Questions 23b) and 23c) of the FAQ on the AIFM Law, and question 6.1 of the FAQ on the UCI Law, anticipate upcoming and eventual further extensions of the exemption in Article 32 of the PRIIPs Regulation granted to UCITS management companies which produce a UCITS key investor information document (KIID), and to AIFMs that provide for their alternative investment funds a UCITS-like KIID.
Questions 23l), 23n) and 23q) clarify that, as a rule, final PRIIPs KIDs/UCITS-like KIIDs do not have to be notified to the CSSF. But if the CSSF requests them to be submitted on a case-by-case basis, the instructions of the CSSF’s circular 19/708 have to be adhered to. The CSSF also clarifies that manufacturers of Luxembourg AIFs remain at all times responsible for the drawing up and the content of a final PRIIPs KID/UCITS-like KIID.
The report provides Member State national competent authorities with useful information to support the implementation of the Capital Markets Union, and aims to facilitate increased participation by retail investors in capital markets by providing consistent EU-wide information on cost and performance of investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MiFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors, as laid down in requirements of MiFID II, the UCITS Directive and AIFM Directive.
Strongly increasing interest for RAIF and other non-regulated AIF
The reserved alternative investment fund (RAIF), introduced back in July 2016, continues to attract investors’ interest. 670 RAIFs have now been formed (figures from the companies register as at the beginning of June) investing in a wide variety of asset classes, not only illiquid asset classes but also liquid strategies including high frequency trading.
As we have noticed in previous editions, investors around the globe are becoming more familiar with the product and are treating it more and more as equivalent to the SIF (and to a smaller extent the SICAR), having the high standards of structural quality and flexibility that the SIF provides but without the additional regulation of the product as well as the service providers.
Besides this, for illiquid asset classes AIF’s structured as unregulated partnerships (SCS or SCSp) have also seen strongly increasing demand. Promoters and investors appreciate the legal framework allowing (to the extent requirements met) for the choice from the set-up as AIF only managed by a registered AIFM (and, for instance, not requiring a depositary) to the set-up as AIF managed by an authorised AIFM, both, for instance, allowing for investments without the requirement of minimum diversification, to the extent this is intended.
Even though the RAIF and the unregulated AIF as described above are currently dominating the structural demand in the alternative asset classes, the SIF as the traditional regulated fund vehicle with its long year market position and flexibility continuous to preserve its role in the range of available fund products. This applies certainly more for strategies involving liquid asset classes and/or markets where certain investors are more comfortable or the legal framework is favouring/requiring regulated fund vehicles and funds not qualifying as AIF, such as fund vehicles reserved for a pre-existing group of investors, i.e. a family (please refer to the definition provided by ESMA).